Madrid: Concern over troubled Spanish lender Bankia and the government's ability to come up with the €19 billion (Dh87.39 billion) bailout the bank needs to bolster its defences sent the nationalised lender's stock price plummeting and Spain's borrowing costs soaring yesterday.
Shares in Bankia fell 28 per cent on opening in Madrid yesterday — the bank's first day back on the stock exchange following its announcement on Friday that it would need a bigger bailout than expected to shore itself up against its bad loans.
The shares, which recovered slightly by midday to trade 14 per cent down, had closed at €1.57 before trading was suspended on Friday.
Bankia S.A. has been one of the banks hardest hit by Spain's real estate collapse over the past four years.
It is estimated to have €32 billion in toxic assets and was effectively nationalised earlier this month when the government converted €4.5 billion in rescue funds it gave last June into shares.
Among the chief concerns surrounding Bankia's request for state aid — the largest in Spanish history — is just how Spain plans to fund it.
The country's borrowing costs have risen sharply over the past few weeks. On Monday, the interest rate, or yield, for 10-year bonds on the secondary market — a key indicator of market confidence — was up 13 basis points by midday to 6.42 per cent.
A rate of 7 per cent is considered unsustainable over the long term and there is concern that Spain might soon be pushed to join the ranks of Greece, Ireland and Portugal and seek an international bailout. Bank of Spain estimates show Spain's banks are sitting on some €180 billion ($233 billion) in assets that could cause them losses.
The government fears the cost of rescuing the country's vulnerable banks could overwhelm its finances, which are already strained by a double-dip recession and an unemployment rate of nearly 25 per cent, and force it to seek a rescue by the rest of Europe.
With the cost of borrowing so high, the government is considering an unconventional technique pay for the Bankia bailout that would avoid the capital markets.
An economy ministry official confirmed news reports that the government is considering injecting government debt into Bankia's accounts. The bank could then turn to the European Central Bank and use those bonds as collateral to receive cash for the recapitalisation.
The official spoke on condition of anonymity in keeping with ministry policy. However, analysts said that such a technique would only prove to investors that the country is having difficulties raising money on the international debt markets and would therefore make them even more reluctant to buy Spanish debt.
"It sends a signal of a lack of confidence," said Mark Miller of Capital Economics in London.
"It probably is self-perpetuating. It is a Catch-22 situation, but of course that's true of the Spanish economy anyway at the moment," he said.
